Employment, Hours and the Welfare Effects of Intra-Firm Bargaining

Maarten Dossche (1) , Vivien Lewis (2) , Céline Poilly (3)

1 European Central Bank
2 KU Leuven - Catholic University of Leuven = Katholieke Universiteit Leuven
3 GREQAM - Groupement de Recherche en Économie Quantitative d'Aix-Marseille

Intra-firm bargaining between a multiple-worker firm and an individual employee leads to overhiring. Taking advantage of the decreasing returns to scale in employment, the firm can reduce the marginal product by hiring an additional worker, thereby reducing the bargaining wage paid to all existing employees. We show that this externality is amplified when firms can adjust hours per worker as well as employment. Hours are too low at the steady state. This misallocation of labor leads to sizeable welfare losses. Our finding is important for economies in which hours adjustment play an important role as it does in many Euro Area countries.

Mots clés: distortions; intra-firm bargaining; optimal monetary policy

Domaines: Economies et finances

Maarten Dossche, Vivien Lewis, Céline Poilly. Employment, Hours and the Welfare Effects of Intra-Firm Bargaining. 2016. ⟨halshs-01367174⟩